There’s growing evidence that the much vaunted strength of the Australian banking system is starting to fray around the edges.

At least two major regional banks, Bendigo and Adelaide Bank and Suncorp are facing problems in their loan books and in their bad debt provisions that raise questions about their health.

Yesterday we reported on the problems Bendigo Bank are facing from the Great Southern collapse, today it’s the struggle of the Brisbane-based Suncorp Metway’s turn to be in the spotlight.

So what’s the main story for shareholders in Brisbane-based banking and insurance group Suncorp Metway?

Is it the fact that the company is all but broke, facing rising bad debts, falling revenues and profits? Is it that its banking and insurance businesses are crushed by the recession, credit crunch and rising insurance claims?

A columnist in the Sydney Morning Herald nailed Suncorp along these lines this morning.

Or is it the funding peculiarities of the Federal Government’s bank guarantee as this story from The Australian would have us believe? The story ignored any mention of the damage done to the bank by an incompetent board, a former Chief Executive with a badly-flawed strategy and too much investment in property finance and in insurance via the Promina takeover.

One report highlighted the problems and found the culprits, the other let the board and former management off the hook and neglected the fact that Suncorp, being a single A-rated bank would be paying more for its money if conditions were normal and there wasn’t a Government guarantee backed by the country’s AAA rating.

The comments by Suncorp’s acting CEO and amplified by The Australian are an attempt to get something the bank isn’t entitled to: a funding cost lower than what their normal everyday credit rating would entitle the bank too (Besides Suncorp, the bank of Queensland and the Bank of Queensland have made similar claims about the Federal Government rating). It’s a try on, and in the case of Suncorp, its been compounded by its own incompetence and poor strategy that has left it high and dry and totally on the hook of government-guaranteed funding.

Suncorp would not be on death’s door if it hadn’t over invested in Promina ($7.9 billion, which is more than the bank is now worth, a point Crikey has made several times in the past year) and if it hadn’t been the lender of last resort to the desperate property developers in and around Sydney and the Gold and Sunshine Coasts in Queensland.

Instead the board supported former CEO John Mulcahy’s ambitions against those of the current, temporary CEO (Mulcahy’s replacement), Chris Skilton who had objected to the strategy and warned the board of their dangers to the company. He had to detail the bad news yesterday. That background was missing from The Australian‘s report, which merely concentrated on yet another attack on a “Labor” policy.

The Australian has also ignored the predicament Bendigo and Adelaide Bank finds itself in, which is also all of its own making. Bendigo is a regional bank and is facing the same undoubted funding pressures that Suncorp is and that Suncorp is seeing from the way the market is costing debt issues from regional banks like these two against debt issues from bigger banks. Bendigo’s fate is now firmly tied to those of thousands of investors in the failed Great Southern investment company.

As reported yesterday, at least one leading banking analyst (Craig Williams at Citigroup) reckons Bendigo’s loan loss provisions might prove too small to handle defaults on its Great Southern loans.

Suncorp has already had big losses on property lending, big losses in its insurance business on bad weather and other claims; and saw the CEO depart after it wrote down earnings and was forced to raise more capital earlier this year.

Yesterday it warned that it lost another $136 million in impairments in the quarter to the end of March, taking the company’s impaired assets to $1.241 billion, from $986 million at the end of December. bad debts are now up to $491 million.

It’s no use Mr Skilton or anyone complaining about the ACCC approving the Westpac-St George or Commonwealth purchase of BankWest. The harsh reality is that by the end of this year, Suncorp and Bendigo Bank may only exist inside another bank if conditions turn bad again.

That would leave the Bank of Queensland as the only regional bank of any size. It has problems in its franchised branch system which won’t go away.

There was no support from leading broking houses this morning: Merrill Lynch headlined its report “Deteriorating” and said “the only real positive argument that the bulls are grasping at the moment is the prospect that the business will be broken up”, while Goldman Sachs JBWwere said it continued to value the company on “a breakup or SOTP basis (Sum Of The Parts, or takeover and break up). Hardly ringing endorsements. 

There’s a lot of talk about the continuing strength of the Australian banking system: but there is also enough evidence of problems in some regional banks to start worrying.

Peter Fray

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